Knowledge that Transforms

Using a proprietary data set covering all foreign investors’ daily trades in the Chinese stock market from 2016 to 2019, we find that foreign order flows, facilitated by regulatory liberalization through several channels, present strong predictive power for future stock returns, implying that these order flows are likely informed. We track the source of this informativeness and find that foreign order flows significantly predict firm-level news and news-day returns, suggesting that foreign investors can effectively process local firm information. Finally, we find that regulatory reforms that generally relax investment access requirements further improve foreign investors’ predictive power.

We investigate how the government, as a customer, affects a supplier’s environmental policies. We find that government contractors have significantly lower levels of toxic pollution. Exploring the mechanisms, we show that government contractors reduce pollution by strengthening internal environmental governance and increasing investments in pollution abatement. Further analysis rules out alternative explanations related to reduced economic activities and financial constraints. Overall, our results highlight the government’s important role in disciplining corporate environmental misbehavior.

The identification of disaster risk has remained a significant challenge due to the rarity of macroeconomic disasters. We show that the interbank market can help characterize the time variation in disaster risk. We propose a risk-based model in which macroeconomic disasters are likely to coincide with interbank market failure. Using interbank rates and their options, we estimate our model via maximum likelihood estimation (MLE) and filter the short-run and long-run components of disaster risk. Our estimation results are independent of the stock market and serve as an external validity test of rare disaster models, which are typically calibrated to match stock moments.

This study examines the impact of recreational marijuana laws (RMLs) on firm-level employment using an imputation-based difference-in-differences (DiD) approach across U.S. states. RMLs significantly reduce employment, particularly among firms with high-skilled labor, strong union presence, permissive corporate cultures, and in states with greater dispensary density. Alternative explanations—including economic crises, COVID-19, fiscal changes, labor regulations, and related policies such as smoking bans and right-to-work (RTW) laws—are systematically ruled out through a series of placebo and robustness tests. RMLs also reduce investment, sales growth, and innovation, suggesting that legalization introduces labor-related frictions with broad implications for firm performance and long-term dynamism.

Stablecoins are a new form of private money. They are fragile but largely trade at par. How? We present a model and empirical work to examine a novel source of demand for stablecoins. Stablecoin owners are indirectly compensated for run risk by lending their coins to crypto speculators. The stablecoin can then support its $1 peg, but this arrangement links crypto speculation to traditional financial markets where stablecoins invest their reserves.

We show that the decision to go public is influenced by spatial variation in the supply of equity financing. We measure the amount of capital of equity investors in each U.S. region and document that the incidence of initial public offerings (IPOs) by intangible-intensive resident firms increases significantly when regional equity capital is abundant. Using a novel empirical strategy and hand-collected data on out-of-state pension flows, we confirm that our findings are not due to underlying regional factors.

We develop a capital structure model in which firms differ in their ability to adjust output prices. Firms with inflexible prices are more exposed to nominal and real shocks, leading to lower leverage, shorter debt maturity, higher cost of debt, tighter covenants, and greater precautionary cash holdings. Shocks to cash flow volatility raise the cost of debt more for firms with less pricing flexibility. We empirically confirm these predictions: Firms with inflexible prices experience significantly larger increases in credit spreads following monetary policy shocks and the 2008 Lehman Brothers bankruptcy, especially when they face high preshock rollover risk.

We exploit U.S. states’ staggered adoption of Universal Demand (UD) laws to study how the risk of shareholder lawsuits affects insider trading. UD laws, which make it harder for shareholders to bring derivative lawsuits against directors and officers, lead to more profitable insider trades, especially sales. This effect is stronger among smaller firms and firms with lower institutional monitoring. After UD laws, the timing of insiders’ trades also appears more opportunistic and riskier, for example, sales increase before negative earnings surprises. Overall, our study offers clean evidence that the threat of shareholder litigation deters opportunistic insider trading.

We exploit heterogeneity in decreasing returns to scale (DRS) parameters across mutual funds to analyze the importance of scalability for investors’ capital allocation decisions. We find strong evidence that steeper DRS attenuate flow sensitivity to performance. We calibrate a rational model of active fund management and show that a large fraction of cross-sectional variation in assets-under-management is due to investors anticipating the effects of scale on return performance. We conclude that DRS play a key role in achieving equilibrium in the intermediated investment management market.

This article studies the making of return predictability among economically linked firms. I characterize an asymmetric cross-firm tug-of-war: i) High peer overnight returns are followed by elevated overnight returns for focal stocks, which fully reverse during intraday, and ii) high peer intraday returns are followed by high intraday returns but minor overnight price reactions. This pattern aligns with the story that individuals’ persistent trading on salient information distorts opening prices, while slow-moving arbitrage by professional investors gradually corrects mispricing. Mutual fund and hedge fund flows exhibit distinct associations with the tug-of-war, supporting the hypothesis that heterogeneous demand drives the return predictability.